The weekend beginning Saturday, 13th September, will go down as the two-day period that changed the face of Wall Street. Lehman Brothers and Merrill Lynch were on the ropes, at the mercy of short sellers. Rumours and speculation were rife. Would Lehman fall or merge ? Would the US government come to the rescue with a bailout ? Would Merrill Lynch be the next shoe to drop ? And what would happen to Goldman Sachs and Morgan Stanley ? As a comprehensive Wall Street Journal article has now made clear, the decisions made over those two days sealed the fate of all these key financial markets players.

Here's the story:

Lehman CEO Richard Fuld appeared to be close to panic. Having been adamant that no crisis would be big enough for him to consider merging or selling his firm, he was now after a deal - any deal. It was a deal or bankruptcy now, as Fuld had two days to save the firm he built.

Over the weekend, Fuld had reached out to both Bank of America and Barclays. Both firms in the end backed away from a deal due to the questionable value of some of Lehman's toxic assets, and in the absence of the offer of help from the US government (although Barclays later acquired the firm's US businesses post Chapter 11). After reviewing Lehman's books, Bank of America's due diligence deal team were nearly home in Charlotte, when they were ordered back to New York - to look over Merrill. Merrill boss John Thain, fearing that his firm could also end up filing for Chapter 11, wanted to sell a 9.9% stake. Bank of America boss Ken Lewis, however, was only interested in the whole firm. And he is said to have refused to return increasingly desperate calls from Dick Fuld (Lewis's wife was apparently charged with finally giving Fuld the brush off, telling him: 'If Mr Lewis wanted to call (you) back, he would call back').

Thain also started talks with Morgan Stanley CEO John Mack about a merger. Mack needed a couple of days, however, to get his board in line. Thain didn't have the time. In the meantime, Goldman was interested in taking a 9.9% in Merrill, but Merrill executives began to worry that this would just not be enough.

Come Monday, and the mists began to clear. Bank of America acquired Merrill Lynch, and Lehman filed for bankruptcy. Morgan Stanley decided to plough ahead with a deal to sell a stake to Japan's Mitsubishi UFJ Financial, and both Morgan Stanley and Goldman soon became bank holding companies, in order to access the Fed's discount window. In two days, the face of Wall Street had changed.

Finally, The Times reports that the fact that Lehman rushed to bankruptcy without a credible plan could have cost creditors some $75bn. The newspaper quotes Bryan Marsal, the co-CEO of Alvarez & Marsal, which is helping with the restructuring of the firm, who said that the bankruptcy resulted in an 'unconscionable waste of value' as Lehman executives had no proper wind down plan in place. Marsal said: 'Had rules of crisis management been followed, much of the value that was lost by the unsecured creditors would have been prevented'. 

Sources - The Wall Street Journal, The Times

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